MS 
:opy 1 



Reparations 

and 

International Detts 



SPEECH 

DELIVERED BY 

Hon. OGDEN L. MILLS, M. C. 

BEFORE 

ECONOMIC CLUB OF NEW YORK 
AT HOTEL ASTOR 



MONDAY, NOVEMBER 27, 1922 



Reparations 

and 

International Debts 



SPEECH 

DELIVERED BY 1, _ 

Hon. OGDEN Lr MlLLS, M. C. 

BEFORE 

ECONOMIC CLUB OF NEW YORK 
AT HOTEL ASTOR 



MONDAY, NOVEMBER 27, 1922 






Gift 
Hon, Eobart Lues 

m 22 '§23 






IN THE discussion of the topic which you have selected, 
I propose to confine myself strictly to some of the eco- 
nomic aspects of the question. Frankly, I do not believe 
that a solution will be furthered at this time by debating 
whether the debts and obligations, or any part of them, 
should be remitted as a matter of charity or justice. Here 
are a group of enormous liabilities, practically none of 
which are being met today, but which, nevertheless, exert 
so great a pressure on the economic structure of the world 
as to constitute in their present form a serious obstacle to 
economic rehabilitation. The question to be asked is, not 
how they were incurred, or why they were incurred, but 
can they be paid, when can they be paid, how can they be 
paid, and is it wise to press for payment now, and, in 
certain contingencies, ever? 

The reparation obligations have become in the public 
mind so inextricably bound with the whole problem of inter- 
national indebtedness, that a discussion of either one of 
these pro'blems alone seems wholly' inadequate, even from 
a strictly American standpoint. Public opinion is, in the 
main, right, though the four billion dollars, more or less, 
owed us by Great Britain is unquestionably good, irre- 
spective of whether that country collects from Germany or 
not, and though we have a much larger direct interest in 
German obligations than is generally supposed, namely, a 
direct liability of the German Government to the United 
States Government of some 700 million dollars. Public 
opinion is right, because in the case of one of our principal 
debtors, namely, France, the early ability to balance her 
budget and to pay interest on her debts is largely predicated 
on the collection of substantial indemnities from her former 
enemy; in the second place, because the economic recovery 
of Europe is, to a very great extent, dependent on a fully 
restored Germany; and, finally, because we may, from the 
experience of the latter country during the last two years, 

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learn the effect of attempting to enforce international pay- 
ments upon the government of a country which has no 
exportable surplus of either goods or gold, and is burdened 
by an inconvertible paper currency. It is to this last phase 
of the subject that I wish first to address myself, as the 
one most likely to throw light on what should be our course 
in the immediate future, which, after all, is our primary 
concern today, though I am by no means one of those who 
would sacrifice all possible future assets to the evident and 
pressing dangers of the day. 

Germany's ability to pay is a question of national re- 
sources and income from the standpoint of the German 
people, of budget from the standpoint of the German Gov- 
ernment, and of international trade from the standpoint of 
transferring payments. Let us consider these in order. 

The pre-war income of the German people was well over 
10 billion dollars per annum. It is hard, then, to believe 
that their ultimate — not immediate — ability to contribute 
will not permit them to make the annual payments of 500 
million dollars required, exclusive of the percentage of 
export duties, under the terms of the London Agreement. 
This is the amount which Signor Nitti, the Italian states- 
man, estimates Germany can pay, though Mr. Keynes' total 
is somewhat lower — not more than 300 million doillars 
annually. 

The same conclusion can be reached in respect of the 
problem from the budgetary standpoint. But it seems clear 
here again that any substantial payments in the immediate 
future are out of the question. The German budget for 
the financial year 1921-1922 provided for the expenditure 
of 931/2 billion marks, exclusive of reparation payments, 
and for revenue of 59 billion marks. At an assumed ratio 
of 20 paper marks to one gold mark, according to Mr. 
Keynes, reparations due under the London Agreement 
amounted to some 70 billion marks. So that, the repara- 
tion bill would more than absorb all existing revenue, which 
is already insufficient to meet* current home needs. I know 
that the claim is seriously pressed in responsible quarters, 
that Germany can and should balance her budget now, not 
only for the purpose of meeting her obligations, but to put 

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an end to the constant depreciation of the mark. Without 
denying the very obvious need of a real effort on the part 
of the German Government to live within its income, and 
without questioning the undoubted and far-reaching effect 
on the value of the mark, of the steady, use of the printing 
press, nevertheless, I must agree with Mr. Keynes and Pro- 
fessor Williams of Harvard, who both have pointed out that 
to demand restriction of the inconvertible paper as the funda- 
mental cure for the whole problem is to beg the question. 
Mr. Williams concludes from his study of the situation that 
the increase in note issue has followed the decline in ex- 
change, rather than preceded it. Let me quote a pas- 
sage from a recent article by the latter which states the case 
with clarity : 

"It seems unmistakable from Germany's experience last year 
that the sequence of events was as follows: the reparation payments 
by greatly increasing the pressure of demand for foreign bills where- 
with to make remittance, and also by impairing confidence, drove down 
the value of the mark in exchange. Import and export prices rose 
in close sympathy with the exchange, and domestic prices followed 

upward more slowly With prices rising, the state and 

private demand for credit was increased. To meet customers' demands 
for bank notes, bankers, holding their liquid assets mainly in treasury 
bills and only a minimum of the non-interest-bearing Reichsbank 
notes, would present treasury bills for encashment in bank notes, 
increasing the Reichsbank's holding of treasury bills and forcing 
increased issues of bank notes in payment. At the same time, since 
the revenue of the government is relatively fixed in the budget, 
whereas expenditures increase continuously with the rise in prices, 
the resulting deficit compels further issue of bank notes and treasury 
bills. If this analysis is correct, relief for Germany's financial and 
monetary difficulties must be sought in the reparations question and 
the foreign trade, rather than in some point farther down the chain 
of consequences." 

Finally, we come to the third point, namely, ability to 
transfer payments. In the absence of a gold surplus, this 
. can only be done by means of foreign securities held by the 
German Government, or through an exportable surplus of 
goods. The first two methods are not available, for while Sir 
Reginald McKenna estimates that German Nationals still own 
a billion dollars of foreign investments, these are, for the 
most part, safely out of Germany and out of reach of the 
German Government; nor can I believe that they will be 
readily yielded up by the individuals who own them for 
reparation payments. Has Germany an exportable surplus 
of goods? 

For the five years ending with 1913, imports into Ger- 



many exceeded exports on an average by 370 million dollars 
a year, the difference representing the surplus of income 
from foreign investments, shipping earnings, tourist ex- 
penditures, and the like. Since the War removed most of 
these credits, and at the same time deprived Germany of a 
fair proportion of her raw materials, it is evident that, 
irrespective of the payment of her obligations, Germany 
must reorganize her own industrial internal mechanism, as 
well as her international trade. That this is possible is 
not open to dispute, and that in addition, Germany, if given 
a breathing space, could, without too much difficulty, find 
an exportable surplus, is indicated by the experience of 
France in 1870. The French, you will remember, paid an 
indemnity of one billion dollars by 1873, and in the process 
of payment so increased their exports that an average 
adverse balance of trade of 65 million dollars a year for 
the four years 1868 to 1871 was converted into an average 
favorable balance of trade of 46 million dollars in the four 
subsequent years. It is not unreasonable to suppose that 
a similar change might have occurred in Germany had the 
pressure exerted on her been less severe and the minimum 
demands been more reasonable. The fact is, however, that 
Germany has found it impossible even to balance exports 
with imports and her exchange has steadily depreciated. 
The last named circumstance should have favored exports, 
but, except for the early period succeeding the Armistice, 
the periods which have seen the most precipitous drop of 
the mark have likewise witnessed a mounting adverse trade 
balance. Thus, the mark fell from 1.77 cents in May, 1921, 
to .3714 cents in November, while expressed in terms of 
gold marks, the excess of imports over exports, increased 
from 63 million marks in May to 120 million marks in Octo- 
ber. From November to February, 1922, the mark rallied, 
and during those months there was actually an excess of 
exports over imports. But when the mark took its last 
plunge, the situation was again reversed, and imports once 
more exceeded exports month by month. The reasons for 
the paradox will be found, I think, in the need for food- 
stuffs and raw materials — a need which had to be satisfied 
before exports of highly manufactured articles could begin ; 

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in the frantic home buying which the rapidly depreciating 
currency encouraged, accompanied, as it was, by a fear that 
the home market would be stripped of goods; and finally 
by the measures adopted by the Government for controlling 
the export trade. Far from assisting exports, the depre- 
ciating exchange has had the opposite effect, while it has 
produced chaotic conditions in the financial, industrial, and 
commercial life of the country. 

Thus we complete the circle and return to our starting 
point having found every influence, beginning with repara- 
tions, ending with an unfavorable trade balance, and includ- 
ing such powerful factors as government deficits, lack of 
public confidence, frantic buying of goods and securities at 
home and the forced sale of the mark abroad, all tending to 
a never ending depreciation of German exchange. 

From all this, one fact stands out beyond dispute; that 
the policy pursued towards Germany since the Peace Treaty 
was signed has not only extracted but an insignificant 
amount of cash, but has resulted in such economic con- 
fusion that the industrial and commercial reorganizations 
and the stability whichi is essential to business and com- 
mercial dealings — all three of which are prerequisites to 
any payments — have been rendered well-nigh impossible. 
If Germany is to pay, reparation pressure must be relieved 
for a reasonable interval of time so as to permit her to 
stabilize her exchange, to balance her budget, and to reor- 
ganize her industrial and commercial organization. But 
given time, it is impossible for me to believe that German 
energy and efficiency will be unequal to the task of putting 
her own house in order and ultimately making good to a 
reasonable extent the damages inflicted by her war of 
aggression. 

If we turn now to the debts owed us, we find that out 
of a total of some 10 billion dollars, approximately 71/2 
billion is owed by two countries, France and Great Britain; 
of this amount some 4 billion dollars by the latter country. 
Insofar as Great Britain is concerned, her leading statesmen 
and business-men have told us that she is able to pay and 
that she intends to pay, and I, for one, am satisfied that, 
no matter how willing we might be to wipe out this debt, 

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Great Britain could not afford to accept the abrogation of 
the contract without permanent damage to the credit and 
world financial standing acquired through the course of 
many generations by the consistent practice of meeting 
every obligation when due, until the financial promise of 
the British people has come to be looked upon as one that 
could be universally accepted without question. Have you 
considered the effect of remission of this debt on British 
credit and ability to borrow in future emergencies ? I recog- 
nize, of course, the injustice which may result from Great 
Britain making good while she is unable to collect what is 
owed her, but I believe that the British people will want 
to pay in spite of the injustice, and that the proper course 
for us to pursue is to extend payment over a long period of 
time and at minimum interest rates. 

But what of France? Here is a very different problem. 
The French owe Great Britain and the United States no 
less than 6 billion and a half dollars. Whether we look at 
France's ability to pay from the standpoint of her national 
resources, from the standpoint of her governmental budget, 
or from the standpoint of her international trade balance, 
it is quite evident that she will be unable to pay even the 
interest on so vast a sum in the near future. The budget 
for 1922 provides for an authorized expenditure of approxi- 
mately 48 billion francs, of which 25 billion are for ordinary 
and extraordinary expenditures, and 23 billion for so-called 
recoverable expenditures, including reconstruction and the 
cost of the Army of Occupation. The revenue is estimated 
at some 24 billion francs, leaving a deficit of slightly over 
24 billion francs to be covered through loans. On March 
1st of this year, the public debt amounted to nearly 317 
billion francs, of which the foreign debt accounted for 
approximately 75 billion. The interest charges on the in- 
ternal portion of the debt now total over 13 billion 100 
milhon francs, and it is estimated that by 1930 the debt 
service charges will amount to very nearly 17 billion francs 
per annum, or almost 460 francs per capita. If to this be 
added interest on the foreign debt, the burden on the French 
taxpayer, until relieved by substantial reparation payments, 



will be a crushing one, even should it be possible to reduce 
current expenditures to as low a figure as 8 or 9 billion 
francs per annum. 

The French had succeeded by the early part of 1922 in 
about balancing their exports and imports, though lately 
they have not done so well, and with the increased resources 
derived by the acquisition of Alsace and Lorraine and the 
unquestionable increase in efficiency and productive power 
developed during the exigencies of war, it is not unrea- 
sonable to expect that, in the long run, the country which 
paid a 5 billion franc indemnity in four years may even- 
tually extinguish an obligation which at par is six and a 
half times that sum, particularly if France should recover 
at least two-thirds of the amount from Germany, which is 
certainly a minimum estimate of what she should collect. 
But France must have time. How much, no one can tell. 
To be unreasonable, not to give time, can have only one 
result: to well-nigh ruin France, without benefit to her 
creditors. Let those who doubt this study recent German 
history. 

Mr. Hoover, in the illuminating speech which he made 
some two months ago, pointed out that prior to the war the 
rest of the world owed Europe some 30 billion dollars, and 
that it found no difficulty in meeting the interest on this 
huge obligation ; from which he argued that war debts and 
obligations, vast as they might seem, could and would be 
liquidated. He added that the indebtedness to Europe repre- 
sented a growth of 40 years, and this seems to me to be 
the essential difference between such an obligation and the 
ones we are called upon to deal with today: The one grew 
so slowly that international trade and finance was readily 
able to adjust itself so as to effect the transfer of payments 
without serious or, in fact, without any real disturbance. But 
these billions of new -world obligations have come upon us 
overnight. Some people are amazed that ways and means 
cannot immediately be devised to readjust international 
balances, and to bring about instant payments. They deal 
with these debts in terms applicable to contracts between 
individuals and insist on the letter of the bond, utterly 
regardless of the existing conditions. Others, appalled at 

9 



the magnitude of the problem and the vastness of the obliga- 
tions, would wipe them out altogether, irrespective of the 
equities, and regardless of the possibility of an ultimate 
solution. Both of these extreme views are, in my judgment, 
erroneous. Who can foretell the future, the latent possi- 
bilities of increased production which the next 40 or 50 
years may bring forth? International trade doubles every 
twenty years, and what might be an intolerable burden 
today might well prove to be but a moderate one 15 or 20 
years from now. Let us not anticipate the future. Let 
us confine our attention to the immediate present, and if the 
lessons of the last two years mean anything, if the picture 
which I have so inadequately presented to you tonight has 
any significance, there is no doubt but that the wise course 
to pursue today is to relieve the pressure for payment, to 
extend the time over a reasonably long period, and to fund 
or even waive interest, if necessary. The world has all it 
can do to mend the destruction of four years of war, with- 
out complicating this complex and arduous task by attempt- 
ing the immediate settlement and permanent solution of 
these new and stupendous obligations. 



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